Cleantech Economics 101: Higher Fossil Fuel Prices; More Cleantech

David Gold

With all the complexities of cleantech policy and technologies, there
is only one simple thing needed for an explosion of competitive clean
technologies – increased price of fossil fuels.

The amount of R&D expenditures that will need to be invested in
clean technology in order for it to hurdle the bar into competitiveness
is much greater with low fossil fuel prices. And, the lower those
prices, the less appetite the private sector has for making such
investments. This leaves a much-increased burden on the back of
government through grants and subsidies– a back that is close to being
broken from debt. While clean technology development is absolutely
necessary, technology development takes time and, often, a long time.
And technology development is fraught with uncertainty…nobody ever
knows a priori whether such efforts will be successful and how long
they will take. Believe me…every venture fund in the world would love
to be able to know that! But they don’t. However, virtually every
venture fund and researcher will tell you that significant advances
usually take much more time and more money than expected. In an
environment of relatively low fossil fuel prices with high price
volatility, grants and subsidies for an amount of time and at a level
that will make any permanent and meaningful difference are simply
unsustainable. So, for all the focus on “cleantech
stimulus” the most important thing that government can do is to
affect change in the cost of the fossil fuel alternatives.

If we had higher fossil fuel prices or even just clearer visibility and
certainty about future increases, the free market would make dramatic
increases in investment in clean technology. When the free market sees
an opportunity to make a profit, it moves extremely fast. Government
actions that put in motion increases in the cost of fossil fuel
alternatives, even if those increases are phased in over many years,
can have an enormous impact on the money invested by the private sector
in alternatives (and a corresponding decrease in need for government
subsidies and grants). This, in turn, will further accelerate
technology advances, leading to a more rapid convergence of the time
when various technologies can competitively reach the mass market.

Given the reality that fossil fuels are a finite resource, it is a fait
accompli that eventually alternative energy and energy efficiency
technologies will become so compelling that they will dominate the
market. But the
future of fossil fuel prices in the relatively near term (e.g., the
next decade or two) is far from certain as both general economic
conditions and new discoveries such as those in Venezuela’s Orinoco
Belt play a roll. If we didn’t care about global warming, national
security or economic security, there would be little need to do
anything but let the market take its course. Unfortunately,
irrespective of your personal policy hot button, most of us would agree
that we do not have the luxury of the amount of time that this
transition would likely take on its own.

The government has a role to ensure that externalities that are
important to the public are accounted for in the market. But the
government cannot subsidize our way there nor simply mandate that the
market use a specific technology. Should it be surprising that the U.S.
government “mandated” that 100 million gallons of cellulosic ethanol be
produced this year and the EPA estimates that only 6.5 million will
be produced? The government sank $150M into Range Fuels’ cellulosic
ethanol plant expecting it to produce over 10 million gallons, but
Range will only produce about 2.5 million gallons this year. How silly
is it to try to “mandate” use of biofuels – did we not learn anything
from the economic demise of the Soviet Union about government
controlled economies? If oil had remained at over $100/barrel since
2008, I would suggest to you that biofuels production would be much
higher this year without any government mandate.

The government does need to take action and do so in a way that does
not crush our economy. There are important societal externalities
associated with continued use of fossil fuels that are not accurately
reflected in the price of the commodities in the market. Cap and trade
is the right debate to be having… albeit likely the wrong solution.
More on that in my next post.

David Gold is an entrepreneur and engineer with national public
policy experience who heads up cleantech investments for Access Venture
Partners (www.accessvp.com).
This article was first published on his blog, www.greengoldblog.com.

Comments

Great article. From a purely economic perspective, it rings true.

Granted, most stimulus money effectively dies once it's spent. But what if, from the $1 billion or so currently being doled out to the biofuels industry, one really good idea is spawned? And that one idea preceeds the 'natural' economic forces that will both make said idea a money maker, AND cause untold suffering on the planet? We already have gone to war for oil under $100/bbl. Imagine what we will do with sustained >$100/bbl oil prices. War. Now there's a lovely place to spend our tax dollars.

The prudent mind anticipates problems and seeks to mitigate them before they reach critical mass. I agree that economic forces trump most all others. However, if we don't start planting some seeds of change soon, we will be facing a rather turbulent transition to biofuels, with a sharpened gas spout at our throat, prodding us to ante up.

Thanks for your comment Tim. A common misconception is that most of the cleantech stimulus money is going to R&D. The fact is that only about 10% is R&D. Most of the money is handouts to utilities to buy smart meters, subsidies for weatherization of homes and subsidies for wind farm development. If fossil fuel prices were higher I suspect we wouldn't need subsidies and hand outs for these items.